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5 Key Steps to Landing a Mortgage

The subprime debacle has led to tighter criteria in nearly every aspect of mortgage lending, leaving potential mortgage borrowers wondering just what they need to do to qualify for a loan these days.

There are a few steps you can take to increase your chances before you get into the thick of your home search.

• Determine your debt-to-income ratio.

Before the housing bubble burst, home investors were flipping homes they had purchased with no money down. The banks didn't seem to care that the buyers were in over their heads with mortgage debt -- they care now, in a big way.
Lenders are going back to the standard rule of thumb: Your housing expenses (principal, interest, property taxes and insurance, etc.) should be 28 percent or less of your pre-tax monthly income. Your housing expenses plus other debt (car payments, school loans, credit card debt) should not exceed 36 percent of your income. If your household income is $50,000, that means your debt and monthly expenses, including mortgage, should not exceed $1,500 month.

So start paying down your credit cards or get that car loan paid off before applying for a mortgage.

• Check your credit report for your FICO score and look for any errors. Borrowers with FICO scores close to 700 are finding it tough to get loans at the best rates. Even FannieMae and FreddieMac are levying surcharges on anyone with scores below 680. "Borrowers should have their credit reviewed well before they need a mortgage," says Peter Grabel, a private mortgage broker in Connecticut. "There are many things that can be done to improve credit but they can take 30-60 days [to correct]." 

Because lending companies will turn to your credit report to check your score and payment history to see if you were late with any debt payments, check it before they check it so you're not caught by surprise, and give yourself ample time to fix any errors.  You can get a copy of your credit report from any of the three reporting agencies: Trans Union, Experian or Equifax.

Your report will list your score as well as current debt and an estimate of how long it will take to pay it off.  You'll want to lower your debt-to-income ratio and speak to the institutions about removing any errors or bad marks.  If you find yourself needing to call a bank that says you were late paying your credit card bill in the last 90 days, "Call in the morning because near the end of the day [customer service] can be grumpy," says Lynnette Khalfani-Cox, author of "Your First Home: The Smart Way to Get It and Keep It."

• Get pre-qualified.  See if you can get pre-qualified for a mortgage at any bank or lending institution. By sharing information such as debts and earning power, you can find out how much a mortgage you can afford, or how much you need to make to qualify for a certain mortgage.

• Get your down payment ready. Forget about the days of no money down, or even 5 percent down, that characterized the boom-boom days of real estate. Lenders want to see more of a commitment on the part of borrowers before lending money after getting burned on so many bad mortgages. If they don't get the down payment, they won't take the risk -- or you'll pay through the nose for the loan. Try to accumulate a 20 percent down payment. "Borrowing more than 80 percent will be expensive or impossible for many borrowers," says Grabel.

• Document and gather your assets. "If you are getting a gift, which is the norm these days," says Grabel, "it is much easier if the gift is received well before closing (90 days). Don't wait until the last minute to liquidate stocks."  It's not unheard of for applicants to have had their documents held up or closings postponed because redemption checks from stock accounts had not arrived in time.

Sheree Curry is a business journalist who writes a regularly for the Wall Street Journal on real estate issues. Her work has appeared in Entrepreneur, Trump magazine and Black Enterprise.

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